AG01_FUNDAMENTALS OF ACCOUNTING
Introduction
INTRODUCTI
1. Objectives





Identifying Purchases and sales, and the corresponding codification in the Chart
of accounts
Identify Assets, Liabilities, Equities, Expenses and Revenues
Journalizing transactions related to Sales, Purchases, Discounts and
Merchandise Returns.
Journalizing Cash and credit Sales and Purchases.
Journalizing VAT in Sales, purchases, discounts and merchandise returns.
2. Description
In this course, the students are going to learn how to entry operations in the journal,
such as purchases, sales, some expenses and revenues, and how to register the VAT
(Value Added Tax).
3. Methodology
In each unit, you will find:




a short description about how each account works (Groups 6 and 7) and
examples
activities to learn vocabulary and accounting theory
Games or quizzes
more activities to carry out, in order to put theory into practice
(journalizing transactions)
The student will be given the Chart of accounts in doc/pdf format. In some cases, the
students will have to do the entries in the journal, from real invoices.
AG01_Fundamentals of accounting/Introduction
AG01_Fundamentals of Accounting
Glossary
In this part of the Formative Activity, we are going to learn all the vocabulary we need
in order to work the different units.
1. Assets
Pronunciation
Goods or properties plus all the money owed to the company by customers or debtors.
Examples of assets:
Building
Computer
Machinery
Furniture
c
Vehicle
Merchandise
http://recursostic.educacion.es/bancoimagenes/web/
2. Liability
Pronunciation
Obligations of the company. That is to say an amount of money owed by the business
to banks, suppliers, creditors, (someone the business owes money to)…
AG01_Fundamentals of Accounting/Glossary
AG01_Fundamentals of Accounting
Glossary
3. Equity
Pronunciation
It’s the money that belongs to the owners. It’s the amount the owners had invested in
the business. It is also known as CAPITAL.
4. Purchases.
Pronunciation
Buying goods or merchandises that later on we will resale to our customers.
5. Sales
Pronunciation
Selling goods to our customers.
6. Cash Purchases.
Purchases paid immediately in cash (coins and paper) or by check/bank transfer…
7. Credit Purchases.
Purchases that will be paid to the supplier in the future. (not immediately)
8. Cash sales.
Cash sales are sales that the customers pay immediately (in cash, with check, bank
transfer,..)
10. Credit sales
Credit sales are sales that the customers will pay in the future.
AG01_Fundamentals of Accounting/Glossary
AG01_Fundamentals of Accounting
Glossary
11. Ledger account or T account.
Pronunciation
An account is a T-shaped tool, used to keep track of transactions during a period. Each
account has a specific name, and the T-form for each account, has two sides: DEBIT
SIDE (left) and CREDIT SIDE (right).
Debit side
Name of the account
Credit side

Increase of Assets

Increase of Liabilities/Equities or
Capital

Purchases

Sales

Decrease of Liabilities/Equities or
Capital

Decrease of Assets

Expenses

Revenues
The account may have:
1. Debit balance: the amount of the debit entries is bigger than the amount of
credit entries.
2. Credit Balance: the amount of the debit entries is smaller than the amount of
credit entries.
3. Zero balance: the amount of the debit entries is equal to the amount of the
credit entries.
12. Journal.
Pronunciation
It’s a book where all day-to-day transactions are recorded, in chronological order.
The journal entries will include: date, code account, description, and debit/credit
amounts.
13. Chart of accounts
There we can find each code for each account.
AG01_Fundamentals of Accounting/Glossary
AG01_Fundamentals of Accounting
Glossary
ACTIVITIES
ACTIVITY 1.Try to order the letters on these words: you will discover the vocabulary
we have just learnt.
Atess
deLrge cutaocn
yliLaitib
rJlnoua
tiuyqE
straCh of tccsauno
ashePsurc
tiasncroTan
slaSe
aitCalp
iCerdt nryte
sxpeeEn
btDie nyrte
euvRnee
ACTIVITY 2.Replace de gap with the correct letter.
R_ v_ nu_
Cr_ d_ t
P_ rch_ s_
L_ dg_ r
S_ l_
_ ss_ t
C_ p_ t_ l
L_ _ b_ l_ ty
_ ntr_
_ xp_ ns_
D_ b_ t
P_ rch_ s_
ACTIVITY 3.Order the following sentences:

goods money customers or owed or properties to debtors plus the Assets all
company are the by

that pay Sales sales customers Cash the the immediately are

day , The book transactions in Journal where to are chronological is all
recorded order a day.

account codes The chart of accounts is the list of the.

used transactions account shaped keep a a , of An - to during is took track
period T.
AG01_Fundamentals of Accounting/Glossary
AG01_Fundamentals of Accounting
Glossary

of obligations money of owed the by company the : Liabilities an are amount the
to business … creditors , suppliers , banks

the in pay will customers the that sales are sales Credit future.
ACTIVITY 4.Match the text on the left with the text on the right.
1. An increase of assets will be recorded on
a. the debit side of the T-account.
2. An expense will be recorded on
b. the credit side of the T-account.
3. A revenue will be recorded on
c. the debit side of the T-account.
4. A purchase will be recorded on
d. the credit side of the T-account.
5. A sale will be recorded on
e. the credit side of the T-account
6. A decrease of assets will be recorded on
f. de debit side of the T-account.
7. An increase of Liabilities will be recorded on
g. the credit side of the T-account.
ACTIVITY 5.Choose the most appropriate underlined word:
a) The assets/liabilities/capital are goods or things owned by the company.
b) The assets/liabilities/accounts are an amount of money owed by the business to
banks, creditors…
c) Credit purchases are purchases that will be paid to the supplier immediately/in
the future
d) The T-account or ledger account has a debit/credit/zero balance is the amount
of the debit/credit/zero entries is smaller than the amount of debit/credit/zero
entries.
AG01_Fundamentals of Accounting/Glossary
AG01_Fundamentals of Accounting
Unit 1 Purchases
In this unit we are going to learn how to record “purchases of goods” in the Journal Book.
1. Cash Purchase

A cash purchase occurs when we buy goods and we immediately pay the invoice in
cash (coins or notes), by check, by bank transfer….

Now we will see how to record the transaction on the Journal. We will give you the
number of each account (you can check them on the Chart of accounts).
Debit Entry
(600)
Merchandise Purchased
(472)
Input VAT
Credit Entry
(570)
or
(572)
Cash
Banks and financial institutions
(600) Merchandise Purchased: it will register the amount of goods purchased. It’s an
EXPENSE (IT’ S ALWAYS A DEBIT ENTRY)
(472) Input VAT: It’s the VAT (Value added Tax) we will apply on the merchandises.
Remember in Spain there are three VAT rates: 21%, 10% and 4%. It’s an ASSET.
(570) Cash, euros: In this case, as we are paying an expense in coins or notes, the amount
of cash decreases, so we will record a CREDIT ENTRY. It’s an ASSET.
(572) Bank and financial institutions, euros: In this case, as we are paying an expense by
check, bank transfer,…the amount of the Bank decreases, so it corresponds to a CREDIT
ENTRY. It’s an ASSET.
7
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
HIGHLIGHTS
GENERAL RULE:
When dealing with cash transactions think first of all about the cash side:
 money paid into the business bank account is a debit to the bank account therefore
some other account must be credited.
 money paid out of the business bank account is a credit to the bank account
therefore some other account must be debited.
EXAMPLE
The company purchases goods costing 5,000€, and pays in cash. 21% VAT.
5,000
1,050
(600)
(472)
Merchandise
Purchased
Input VAT
(21% x 5,000)
(570)
Cash
6,050
HIGHLIGHTS
CASH PURCHASE: When the purchase is made, the accounts (570) Cash or (572) Bank
will be credited
2. Credit Purchase
A credit purchase occurs when we buy goods or merchandise and we don’t have to pay
immediately but we can pay after a specified number of days.
At the time the purchase is made we cannot make an entry in the bank account or Cash
because no cash is paid.
However there must be another effect on this transaction, and in this case it is that the
business has a creditor (the supplier to whom the money of the purchase is owed).
8
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
Now we will see how to make the booking entries for example in the Journal Book:
Debit Entry
(600)
Merchandise Purchased
(472)
Input VAT
Credit Entry
(400) or
(401)
Suppliers
Suppliers, trade bills payable.
(400) Suppliers: This account is a LIABILITY. It will include the amount due to suppliers of
merchandises. We normally negotiate payment conditions with suppliers, so we can pay the
invoices in 15 days’ time, 1 month time…
If the account increases, we will credit it (we will register a credit entry).
(401) Suppliers, trade bills payable: This account is a LIABILITY. It will include payable to
suppliers in the form of Accepted Trade Bills.
What’s an Accepted Trade Bill? It’s a document, signed by our company, where we accept
that we owe a certain amount to our supplier (because of a purchase of goods), and it
specifies time and place of payment.
EXAMPLE
The company buys goods on credit for 1,000€ (VAT INCLUDED).
(600) Merchandise
(400) Cash
826.45
(472) Purchased
173.55
Input VAT
1,000
9
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
HIGHLIGHTS
VAT INCLUDED
1 . You have to calculate the amount of the Purchase.
st
1,000/ (1+0.21)=826.45
2nd. You have to calculate the amount of VAT.
862.45*0.21=173.55
HIGHLIGHTS
CREDIT PURCHASES AND CREDIT SALES
 A credit purchase happens when goods are bought (or a service received)
and the customer does not have to pay immediately but can pay after a
specified number of days.
 A credit sale happens when goods are sold (or a service provided) and the
customer does not have to pay immediately but can pay after a specified
number of days.
ACTIVITY 1.Order the letters of these words
hasC raspecuh
Crdite upahrsec
pItnu TAV
dCroetri
ppuilSer
radeT llbi plbyeaa
Vta duelndic
rCedit easl
hsaC sael
ACTIVITY 2.Order the words in the following sentences

a can pay not the are happens A number after but to does and goods purchase days
specified pay immediately have customer bought when credit of.

A number after but to does and goods sale days specified pay immediately have
customer sold when credit of a can pay not the are happens.
10
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
ACTIVITY 3
Match the text on the left with the text on the right.
1. A cash purchase occurs when
2. The account (600) Merchandise
purchased is …
3. The account (472) Input VAT is …
4. The account (400) Suppliers is …
5. An accepted Trade Bill is …
a. an expense, therefore is a debit entry.
b. a document signed by our company,
where we accept that we owe a certain
amount to our supplier, and it specifies
time and place of payment
c. we buy goods and we immediately pay
the invoice in cash, by check or by bank
transfer.
d. the VAT we apply on the purchased
merchandises, therefore is a debit entry.
e. a Liability, and it includes the amount
due for buying merchandises.
ACTIVITY 4
Try to find out what letters have disappeared.
S_ ppl_ _ r
G_ _ ds
B_ nk
_ n c_ sh
B_ ch_ck
B_ b_ nk tr_ nsf_ r
_ np_ t v_ t
Tr_ d_ b_ ll p_ y_ bl_
Cr_ d_ t_ r
S_ ppl_ _ r
_ cc_ _ nt
G_ _ ds
M_ rch_ nd_ s_
S_ l_
P_ rch_ s_
11
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
ACTIVITY 5.CROSSWORD
Choose the most appropriate underlined word:
 When we buy merchandises in cash, the account “(600) Merchandise Purchased” will
be debited/credited, “(472) Input Vat” will be debited/credited, and 2(570) Cash” will
be debited/credited.

When we buy merchandises paying by Bank transfer, the account “(600)
Merchandise Purchased” will be debited/credited, “(472) Input Vat” will be
debited/credited, and “(572) Banks”, will be debited/credited.

When we buy merchandises on credit, the account “(600) Merchandise Purchased”
will be debited/credited, “(472) Input Vat” will be debited/credited, and 2(400)
Suppliers”, will be debited/credited.

When we buy merchandises accepting a Trade Bill, the account “(600) Merchandise
Purchased” will be debited/credited, “(472) Input Vat” will be debited/credited, and
2(401) Suppliers, Trade Bill Payable”, will be debited/credited.
ACTIVITY 6
Imagine you know the total amount of a Purchase invoice. What mathematical operations
would you do to find out the amount of VAT?
ACTIVITY 7
Select the effect the transaction has on the Accounting Equation (don’t take into account the
VAT):
 GREEN Ltd mows a client's yard and receives a check from the customer for 60€ for
the service provided.
a)
b)
c)
d)
e)
f)
g)
Assets increase and assets decrease
Assets decrease and liabilities decrease
Assets increase and liabilities increase
Assets increase and owner’s equity increase
Owner’s equity’s decreases and assets decrease
Owner’s equity’s decreases and liabilities increase
Owner’s equity’s increases and liabilities decreases
12
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases

Green Ltd purchases 200€ worth of office supplies for inventory and stores them in
their storage room. The office supply store gives them an invoice that allows them to
pay for them in 15 days (on account).
a)
b)
c)
d)
e)
f)
g)

Green Ltd pays the office supply company 200€ with a check for the office supplies
a)
b)
c)
d)
e)
f)
g)

Assets increase and assets decrease
Assets decrease and liabilities decrease
Assets increase and liabilities increases
Assets increase and owner’s equity’s increase
Owner’s equity’s decreases and assets decrease
Owner’s equity’s decreases and liabilities increase
Owner’s equity’s increases and liabilities decreases
Assets increase and assets decrease
Assets decrease and liabilities decrease
Assets increase and liabilities increase
Assets increase and owner’s equity’s increase
Owner’s equity’s decreases and assets decrease
Owner’s equity’s decreases and liabilities increase
Owner’s equity’s increases and liabilities decreases
Green Ltd purchased seeds for resale for 60€ and received an invoice from their
supplier, who allows them 15 days to pay.
a)
b)
c)
d)
e)
f)
g)
Assets increase and assets decrease
Assets decrease and liabilities decrease
Assets increase and liabilities increase
Assets increase and owner’s equity increase
Owner’s equity decreases and assets decrease
Owner’s equity decreases and liabilities increase
Owner’s equity increases and liabilities decreases
13
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
ACTIVITY 8
Record the transactions made by ACCOUNTS LTD. during 2014 in the Journal Book:
1. On January 5th, the business purchases 1,000€ of goods from FLY Ltd. on credit. VAT
21%.
2. On January 25th, the business pays amount owed to FLY Ltd., in cash.
3. On January 26th, the company purchases goods worth 1,540 € to Blind Ltd. plus VAT
21%. The business pays the full amount due at the time the purchase is made.
4. On January 27th, the firm purchases goods worth 500€ including VAT on credit to
FLAVOUR LTD.
5. On January 28th, the business receives an invoice for goods purchased for 100€ plus
VAT. Paid by Check.
6. On January 29th, the company purchases merchandise in amount of 140 € (including
21% VAT). The amount was paid in cash.
7. On January 30th, the company purchases goods from Supplier FLY LTD. in amount of
24,600€ (including 21% VAT). The amount is due to be paid in 15 days.
8. On February 2nd, the company acquires merchandises on credit to STONE LTD for
1,000€ plus VAT. We accept a Trade Bill for the total amount. Date of payment: on
March 2nd.
9. On February 15th, the company pays in cash the amount due to FLY LTD.
(transaction 7).
10. On March 2nd, the Trade Bill is paid by Bank Transfer.
11. On March 3rd, the company buys goods for 10,000 (VAT included) paying the entire
amount via bank transfer.
12. On March 4, the company makes bank transfer to FLAVOURS LTD. in amount of
500€
13. The company pays 200€ for merchandises plus VAT 21%. (we pay with a check to
the supplier)
14. We spend 200€ plus VAT on goods for resale. Paid in cash.
15. The company pays 200€ on purchases of stock (VAT included).
16. On January 5th, the company buys goods for cash costing 400€ plus VAT 21%.
17. The company buys goods from FLAVOURS LTD. for 1,200€, on credit, and will pay
later (VAT included).
18. The company pays the earlier amount owed to FLAVOURS in cash.
19. The company purchases 10,000€ of goods from FLY Ltd. on credit. VAT 21%.
20. The business purchases goods worth 20,000 € on credit to Blind Ltd. plus VAT 21%.
21. The business purchases goods worth 1,500€ including VAT on credit to FLAVOUR
LTD.
22. The business receives an invoice for goods purchased for 1,500€ plus VAT. Paid by
Check.
23. The company purchases merchandise in amount of 1,400 € (including 21% VAT).
The amount was paid in cash from the bank account.
24. The company purchases goods from Supplier FLY LTD. in amount of 2,400€
(including 21% VAT). The amount is due to be paid in 15 days.
25. The company acquires merchandises on credit to STONE LTD for 1,515€ plus VAT.
We accept a Trade Bill for the total amount.
26. The company buys goods for 10,100 (VAT included) paying the entire amount via
bank transfer.
14
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 1 Purchases
27. The company makes bank transfer to FLAVOURS LTD. in amount of 1,500€
28. The company pays 2,100€ for merchandises plus VAT 21%. (we pay by check)
29. We spend 2,200€ plus VAT on goods for resale. Paid in cash.
30. The business pays 1,500€ on purchases of stock (VAT included)
ACTIVITY 9.GAMES
GAME 1. Fling the teacher.
GAME 2. The quadrant approach.
Game 1.Here you have a link to a Game about Basic concepts of Bookkeeping. You just
have to answer the questions.
Game 2.Here you have a link to an application game (an executable file). You just have
to download and execute it, and you can start to play: your goal is to classify correctly the
accounts into Equities, Assets, Liabilities, Revenue, and Expenses. (Choose the basic A
level)
TO KNOW MORE
If you want to know more about the History of Accountings, you can read the following document.
History of Accounting.
Bibliography

Practical Bookkeeping. Beginner/intermediate. The Institute of Certified Bookkeepers
Aproved Publisher. KAPLAN PUBLISHING.

Beyond Figures. Introduction to Financial Accounting.María del Mar CamachoMiñano. Murat Akpinar. M.J. Rivero-Méndez. Elena Urquía-Grande. Anne Eskola.
EDITORIAL PIRÁMIDE.

A brief history of the Accounting by James de Santis.
http://ensign.ftlcomm.com/historyacc/researchpaperfin.htm

Bean Counter. Free Accounting and Bookkeeping tutorials.
http://www.dwmbeancounter.com/

http://www.icac.meh.es/Documentos/CONTABILIDAD/PGC%20Ingles.pdf
15
AG01_Fundamentals of accounting/Unit 1 Purchases
AG01_Fundamentals of Accounting
Unit 2. Sales
In this unit we are going to learn how to record “sales of goods” in the Journal Book.
1. Cash Sales

A cash sale occurs when we sell goods and our costumer immediately pays the
invoice in cash (coins or notes), by check, by bank transfer….

Now we will see how to record the transaction on the Journal. We will give you the
number of each account (you can check them on the Chart of accounts).
Debit Entry
(570)
Cash
or
(572)
Banks and financial
institutions
Credit Entry
(700)
(477)
Merchandise sold
Output VAT
(700) Merchandise Sold: it will register the amount of goods sold. It’s a REVENUE or
INCOME. (IT’ S ALWAYS A CREDIT ENTRY)
(477) Output VAT: It’s the VAT (Value added Tax) we will apply on the merchandises sold.
It’s a LIABILITY.
(570) Cash, euros: In this case, as money is being paid into the business cash, in the form
of coins or notes, the amount of cash increases, so we will record a DEBIT ENTRY. It’s an
ASSET (but it’s increasing: DEBIT ENTRY)
(572) Bank and financial institutions, euros: In this case, as money is being paid into the
business Bank (by check, bank transfer…), the amount of the Bank increases, so it
corresponds to a DEBIT ENTRY. It’s an ASSET (but it’s increasing: DEBIT ENTRY)
16
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
EXAMPLE
The company sales goods costing 5000€, and the customer pays in cash. 21% VAT.
6,050
(570)
Cash
(700)
(477)
Merchandise sold
Output VAT
(21% x 5000)
5,000
1,050
HIGHLIGHTS
CASH SALE: When the sale is made, the accounts (570) Cash or (572) Bank will be
debited.
2. Credit Sale.
A credit sale happens when we sell goods or merchandise and our customer doesn’t have
to pay immediately, although the invoice has to be paid after a specified number of days.
At the time the sale is made we cannot make an entry in the bank account or Cash because
no cash is paid.
However there must be another effect on this transaction and in this case it is that the
business has a debtor (the customer who owes the firm, the money of the sale.).
Now we will see how to make the booking entries in the Journal Book:
Debit Entry
(430)
Trade receivable
or(431) Trade bills receivable
(700)
(477)
Credit Entry
Merchandise sales
Output VAT
17
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
(400) Trade Receivable: This account is an ASSET. It will include the amount due to the
firm by the costumers. We normally negotiate payment conditions with customers, so the
invoices can be settled in 15 days’ time, 1 month time…
If these account increases, we will debit it (we will register a debit entry).
(401) Trade receivable, trade bills receivable: This account is an ASSET. It will include
receivable from customers, in the form of Accepted Trade Bills.
EXAMPLE
The company sells goods on credit for 1000€ (VAT INCLUDED).
(430) Trade receivables
(700) Merchandise sold
1,000
(477) Output VAT
826.45
173.55
HIGHLIGHTS
VAT INCLUDED
1 . You have to calculate the amount of the sale.
st
1,000/ (1+0.21)=826.45
2nd. You have to calculate the amount of VAT.
862.45*0.21=173.55
HIGHLIGHTS
CREDIT SALES
 A credit sale happens when goods are sold (or a service provided) and the
customer does not have to pay immediately but can pay after a specified
number of days.
18
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
ACTIVITY 1.Order the words in this sentence
paid pay goods of invoice customer happens after immediately or days has doesn’t when a ,
merchandise A to have we specified although and credit be to sell number the our sale.
ACTIVITY 2.Order the letters in these words
sedecaMirhn sodl
puOttu TVA
uoalrJn
nAuctco
ridCet asurepch
rTaed belcevaire
dTera lilsb eecvlerbia
VTA iunldced
eCirtd elas
ACTIVITY 3.Try to find out which vowel is missing
S_ l_ s _ f g_ _ ds
J_ _ rn_ l B_ _ k
J_ _ rn_ l_ z_ ng
T_ cr_ d_ t _ n _ cc_ _ nt
T_ d_ b_ t _ n _ cc_ _ nt
_ nc_ m_ _ r R_ v_ n_ _ .
_ xp_ ns_
_ ss_ t
L_ _ b_ l_ ty
_ q_ _ ty
ACTIVITY 4.Match the text on the left with the text on the right.
Match the text on the left with the text on the right.
1. A cash sale occurs when
2. (700) Merchandise sold is
3. (477) Output VAT is
4. A credit sale happens when
5. (430) Trade receivable includes
6. (431) Trade bills receivable includes
a. The tax rate we apply on the merchandises
sold.
b. An Income.
c. The amount due to the firm by the
costumers.
d. Receivable from customers, in the form of
Accepted Trade Bills.
e. We sell goods and our client doesn’t have
to pay immediately.
f. The firm sells goods and the costumer
immediately pay the invoice (in cash or by
Bank).
19
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
ACTIVITY 5
Record the transactions made by ACCOUNTS LTD. during 2014 in the Journal Book:
1. On January 5th, the company sells 1,000€ of goods to LIE Ltd. on credit. VAT 21%.
2. On January 25th, LIE Ltd pays amount owed to the firm, in cash.
3. On January 26th, the firm sells goods worth 1,540 € to WILD Ltd. plus VAT 21%. The
customer pays the full amount due at the time the sale is made.
4. On January 27th, the business sells goods worth 500€ including VAT on credit to
FAVOUR LTD.
5. On January 28th, the business sends an invoice for goods sold for 100€ plus VAT.
Paid by Check.
6. On January 29th, the company sales merchandise in amount of 140 € (including 21%
VAT). The amount was paid in cash by the costumer.
7. On January 30th, the company sales goods to the costumer LIE LTD. in amount of
24,600€ (including 21% VAT). The amount is due to be paid in 15 days.
8. On February 2nd, the company sells merchandises on credit to PRONE LTD for 215€
plus VAT, who accepts a Trade Bill for the total amount. Date of payment: on March
2nd.
9. On February 15th, LIE LTD pays in cash the amount due to the firm. (Transaction 7).
10. On March 2nd, the Trade Bill is paid by the costumer, by Bank Transfer (Transaction
8)
11. On March 3rd, the company sells goods for 10,000 (VAT included) receiving the entire
amount via bank transfer.
12. On March 4, FAVOUR LTD makes bank transfer to the firm in amount of 500 €.
13. The company receives 200€ for merchandises plus VAT 21%. (the customer pays by
check)
14. We sell 2,400€ plus VAT that are paid in cash.
15. The customer pays 200€ for sales of goods (VAT included)
16. On January 5th, the company sells goods for cash costing 400€ plus VAT 21%.
17. The company sells goods to FAVOUR LTD. for 1,200€, on credit, and the customer
pays later (VAT included).
18. FLAVOUR LTD pays the earlier amount owed to the company in cash.
19. The company sells 10,000€ of goods to LIE Ltd. on credit. VAT 21%.
20. The business sells goods worth 20,000 € on credit to Klind Ltd. plus VAT 21%. The
client pays the full amount due at the time the sale is made.
21. The business sells goods worth 1,500€ including VAT on credit to FAVOUR LTD.
22. The business sends an invoice for goods sold for 1,500€ plus VAT. Paid by Check.
23. The company sells merchandise in amount of 1,400 € (including 21% VAT). The
amount was paid in cash by the customer.
24. The company sells goods to LIE LTD. in amount of 2,400€ (including 21% VAT). The
amount is due to be paid in 15 days.
25. The company sells merchandises on credit to TONE LTD who accepts a Trade Bill for
1,850€.
26. Goods are sold for 10,100 € (VAT included) receiving the entire amount via bank
transfer.
27. The company receives bank transfer from FAVOURS LTD. in amount of 1,500€
28. The company receives 2100€ for merchandises sold plus VAT 21%. (The customer
pays by check)
20
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
29. Goods are sold for 2,200€ plus VAT. Paid in cash.
30. Received 1,600€ in cash, for sales of stock (VAT included)
ACTIVITY 6.GAMES
Game. Accounting terms Quiz
TO KNOW MORE
What is profit?
www.Tutor2u.net
Bibliography

Practical Bookkeeping. Beginner/intermediate. The Institute of Certified Bookkeepers
Aproved Publisher. KAPLAN PUBLISHING.

Beyond Figures. Introduction to Financial Accounting.María del Mar CamachoMiñano. Murat Akpinar. M.J. Rivero-Méndez. Elena Urquía-Grande. Anne Eskola.
EDITORIAL PIRÁMIDE.

www.Tutor2u.net

Bean Counter. Free Accounting and Bookkeeping tutorials.
http://www.dwmbeancounter.com/

http://www.icac.meh.es/Documentos/CONTABILIDAD/PGC%20Ingles.pdf
21
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 2. Sales
22
AG01_Fundamentals of accounting/Unit 2 Sales
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
In this unit we are going to learn how to journalize purchases discounts and merchandise
returns.
1. Discounts on purchases.
There are two main types of discounts:

(606) Prompt payment discount
Discounts and similar reductions for prompt payment granted to the company by its suppliers
and not included in the invoice. It is also called SETTLEMENT DISCOUNT.

(609) Volume discounts
Discounts and similar reductions granted to the company for having reached a certain
volume of orders.
 (608) Purchase returns
This account includes: the discounts that are NEITHER a PROMPT PAYMENT NOR a
VOLUME DISCOUNT (not included in the invoice).
For example, discounts for lack of quality in the merchandises, delay in the delivery time…
Highlights
Discounts on purchases are REVENUES. If the purchase is a DEBIT ENTRY, the discounts
are CREDIT ENTRIES
23
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
EXEMPLES
 The firm purchases goods for 10,000€, and the supplier offers a deduction of 20%
trade discount, included in the invoice. VAT 21%. Cash payment.
8,000 (600)
1,680 (472)

Merchandise Purchased
(10000-0.1*10000)
Input VAT
(0.21*8000)
(570)
Cash
9,680
The previous supplier, gave us a 100 € settlement deduction in cash, not included in
the invoice. VAT 21%
121
(570)
Cash
(606)
(472)
Prompt payment
discount
Input VAT
100
21

The previous supplier gave us 100€ volume deduction, not included in the invoice.
VAT 21%.
121
(400)
(609)
100
Suppliers
Volume discount
(472)

Input VAT
21
The previous supplier gave us a discount of 150€, because the merchandise didn’t
meet the conditions of the supply order. VAT 21%. Not included in the invoice.
181.5 (400)
Suppliers
(608)
Purchase returns
150
(472)
Input VAT
31.5
Highlights
REMEMBER, INPUT VAT is ALWAYS applied on PURCHASES AND DISCOUNTS ON
PURCHASES.
Highlights
If we have a discount NOT INCLUDED IN THE INVOICE, we just have three accounts to
journalize the transaction: 606, 609 or 608.
24
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
2. Merchandise returns
This account includes Shipments of merchandise and goods returned to suppliers, normally
because they do not meet the conditions of the order.
Highlights
This account shall also include discounts, subsequent to receipt of the invoice.
Example: The firm returns to the supplier, merchandises for 1500 €. VAT 21%.
1,815 (400)
Suppliers
(608)
Purchase returns
1,500
(472)
Input VAT
315
ACTIVITY 1.Order the words in this sentence
purchase included to amount kind the subtracted the discount has the Any in be of of invoice
to
shipments Returns account order of the not they normally suppliers returned and of includes
Merchandise The the conditions meet do because , to goods merchandise
ACTIVITY 2.Order the letters in these words
euscahrP entsurr
tpIun AVT
rmptPo ytnamep dciosutn
uolVme oudntsci
etmttelSne tiocudns
lySpup odrer
lVoeum of rserod
ceDinudot
redaT ditnscuo
ACTIVITY 3.Try to find out which vowel is missing
Sh_ pm_ nt _ f m_ rch_ nd_ s_
R_ t_ rn_ d g_ _ ds
R_ c_ _ pt _ f _ nv_ _ c_
Tr_ d_ d_ sc_ _ nt
Pr_ mpt p_ ym_ nt d_ sc_ _ nt
_ ncl_ d_ d _ n th_ _ nv_ _ c_
25
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
ACTIVITY 4.Match the text on the left with the text on the right
1. “Prompt payment discounts” are
2. The account “Merchandise returns” shall
also include
3. Discounts on purchases are
4. Input vat is always
5. The account “purchase returns” includes
a. revenues.
b. any type of discount, that is neither a
prompt payment nor a volume discount, not
included in the invoice.
c. applied on purchases and discounts on
purchases.
d. discounts, subsequent to receipt of the
invoice
e. reductions for quick payment granted to
the company by its suppliers and not included
in the invoice. They are also called
SETTLEMENT DISCOUNTS.
Highlights
When journalizing activities, we always suppose that VAT is not included, apart from the
following situations:
 The exercise indicates that VAT is INCLUDED.
 We are giving or receiving a CHECK.
And if there is no complementary information, we always apply 21% VAT rate.
HIGHLIGHTS
CREDIT NOTE OR CREDIT MEMORANDUM
Document issued by a supplier to a customer, cancelling a part of the total amount of a
sales invoice.
Business normally issues a credit note:
 When a customer has returned faulty or damaged goods
 When a customer has returned perfect goods by agreement with the supplier
A Credit note is the REVERSAL OF a previous invoice or part of the invoice value.
26
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
ACTIVITY 5.Journalize the following transactions
1. On January 5th, purchase 1,000€ of goods from FLY Ltd. on credit, with a 3% trade
discount. VAT 21%.
2. On January 25th, the business pays amount owed to FLY Ltd., in cash.
3. On January 26th, purchase goods worth 1,540 € on credit to Blind Ltd. plus VAT 21%.
The business pays the full amount due at the time the purchase is made, and for this
reason the supplier gives us a 3% discount for early payment.
4. On January 27th, purchase goods worth 500€ including VAT (21%) on credit to
FLAVOUR LTD. Trade discount 2%.
5. On January 28th, the business receives an invoice for goods purchased for 100€ plus
VAT on credit.
6. On January 29th, the company pays the previous invoice (transaction 5), and for this
reason the supplier offers a settlement discount of 5€ (plus VAT).
7. On January 30th, the company purchases goods from Supplier FLY LTD. in amount of
24,600€ (plus VAT 21%) including a 1% trade discount. The amount is due to be paid
in 15 days.
8. On February 1st, our company is given a volume discount for 200 € plus VAT.
9. On February 2nd, the company acquired merchandises on credit to STONE LTD, for
1,000€ with a trade discount of 30€. We accept a Trade Bill for the total amount. Date
of payment: on March 2nd.
10. On February 15th, the company paid in cash the amount due to FLY LTD. (transaction
7).
11. On March 2nd, the Trade Bill was paid by Bank Transfer.
12. On March 3rd, the company bought goods for 10,000 (plus VAT) paying the entire
amount via bank transfer. Discount 2% for early payment.
13. On March 4, the company made bank transfer to FLAVOURS LTD. in amount of
500€ . Settlement discount 30€. (plus VAT)
14. The company bought 200€ for merchandises plus VAT 21%. (We paid by check to
the supplier). Settlement discount 1%.
15. We were granted with a Volume discount of 250€. VAT 21%.
16. Our supplier gave us a discount for delivery delays of 50€ plus VAT.
17. We spent 200€ plus VAT on goods for resale. Paid in cash. Trade discount 1% and
Settlement discount 3%.
18. Paid 200€ on purchases of stock (VAT included)
19. The previous supplier (transaction 18) gave the company a 50€ discount for defective
goods. (VAT 21%)
20. On 5 January bought goods for cash costing 400€ plus VAT 21%. Trade discount 1%,
and settlement discount 1,5%.
21. The company bought goods from FLAVOURS LTD. for 1,200€, on credit(VAT
21%included).Trade discount 2%.
22. The company paid the previous amount owed to FLAVOURS in cash. Settlement
discount 30 €.
23. The company purchased 10,000€ of goods from FLY Ltd. on credit. VAT 21%.Trade
discount 4%.
24. The business purchased goods worth 20,000 € to Blind Ltd. plus VAT 21%. The
business paid the full amount due at the time the purchase was made. Settlement
discount 1.3%.
27
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 3 Purchases: Discounts and Returns
25. The business purchased goods worth 1,500€ including VAT on credit to FLAVOUR
LTD.
26. The company returned faulty goods for 600 € plus VAT (the goods were paid in cash).
27. Damaged goods were returned to the supplier for 1,500 € (VAT included 21%).
28. The company was given a volume discount worth 50 € plus VAT.
29. Our supplier gave us a discount for delivery delays of 100 € (21% VAT included), and
sends the corresponding Credit note or memo.
30. The company returned defective merchandise to FLY ltd. for 250€ (VAT included),
receiving from de supplier the corresponding Credit note.
ACTIVITY 6.GAMES
Game. Walk the plank.
TO KNOW MORE
What is AMADEUS DATABASE?
Bibliography

Practical Bookkeeping. Beginner/intermediate. The Institute of Certified Bookkeepers
Aproved Publisher. KAPLAN PUBLISHING.

Beyond Figures. Introduction to Financial Accounting.María del Mar CamachoMiñano. Murat Akpinar. M.J. Rivero-Méndez. Elena Urquía-Grande. Anne Eskola.
EDITORIAL PIRÁMIDE.

Bureau Van Dijk. Company information and business database.
http://www.bvdinfo.com

Bean Counter. Free Accounting and Bookkeeping tutorials.
http://www.dwmbeancounter.com/

http://www.icac.meh.es/Documentos/CONTABILIDAD/PGC%20Ingles.pdf
28
AG01_Fundamentals of accounting/Unit 3
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
In this unit we are going to learn how to journalize sales discounts and merchandise returns.
1. Discounts on sales.
There are two main types of discounts:

(706) Prompt payment discount
Discounts and similar reductions for prompt payment given to our customers (not included in
the invoice). It is also called SETTLEMENT OR CASH DISCOUNT on sales.

(709) Volume discounts
Discounts and similar reductions granted to our customers for reaching a certain volume of
orders.
 (708) Sale returns
This account includes: the sale discounts that are NEITHER a PROMPT PAYMENT NOR a
VOLUME DISCOUNT (not included in the invoice).
For example, discounts for lack of quality in the merchandises, delay in the delivery time…
Highlights
Discounts on sales are EXPENSES. If the SALE is a CREDIT ENTRY, the discounts are
DEBIT ENTRIES
29
AG01_Fundamentals of accounting/Unit 4
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
EXEMPLES
 The firm sells goods for 10,000€, with a deduction of 20% trade discount, included in
the invoice. VAT 21%. Cash payment.
9,680 (570)
Cash
(700)
(477)

Merchandises sold
(10000-0.2*10000)
Output VAT
(8000*0.21)
8,000
1,680
The previous customer is granted a 100 € settlement deduction in cash, not included
in the invoice. VAT 21%
100
(706)
Prompt payment discount
21
(477)
Output VAT (100*0.21)
(570) Cash
121

The previous customer is given a 100€ volume deduction, not included in the invoice.
VAT 21%.
100
(709)
(430)
121
Volume discounts
Trade receivables
21
(477)
Output VAT (100*0.21)

The firm grants a discount of 150€ to our client, because the merchandises sold didn’t
meet the conditions of the supply order. VAT 21%. Not included in the invoice.
150
31.5
(708)
(477)
Sales returns
Output VAT (150*0.21)
(430)
Trade receivables
181.5
Highlights
REMEMBER, OUTPUT VAT is ALWAYS applied on SALES AND DISCOUNTS ON SALES
Highlights
If we GRANT a discount NOT INCLUDED IN THE INVOICE, we just have three accounts
to journalize the transaction: 706, 709 or 708.
30
AG01_Fundamentals of accounting/Unit 4
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
2. Sales returns
This account includes Shipments of merchandise and goods returned for our customers,
normally because they do not meet the conditions of the supply order (For example:
defective or unacceptable merchandise)
Highlights
This account shall also include discounts, subsequent to receipt of the invoice.
Example: The firm returns to the supplier, merchandises for 1,500 €. VAT 21%.
1,500 (708)
315
(477)
Sales returns
Output VAT
(430)
Trade receivables
1,815
ACTIVITY 1.Order the words in this sentence
returned of Sales supply the they customers goods Shipments account the meet because
our and includes The of not normally for merchandise Returns order conditions do
in TO the sale of the BE amount transaction discount invoice SUBSTRACTED of Any
included HAS TO the kind
ACTIVITY 2.Order the letters in these words
sSeal returns
uOuttp TVA
readT rbsveeecail
hinStpesm of rmceieadsnsh
eomlVu ocnitsusd
ACTIVITY 3.Try to find out which vowel is missing
Pr_ mpt p_ ym_ nt d_ sc_ _ nt
C_ sh d_ sc_ _ nt
S_ ttl_ m_ nt d_ sc_ _ nt
Cr_ d_ t n_ t_
Tr_ d_ d_ sc_ _ nt
Tr_ d_ r_ c_ _ v_ bl_ s
31
AG01_Fundamentals of accounting/Unit 4
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
ACTIVITY 4.Match the text on the left with the text on the right.
1. Discounts on sales are
2. Discounts on purchases are
3. Discounts on sales are
4. Discounts on purchases are
5. OUTPUT VAT is always applied on
6. INPUT VAT is always applied on
a. Credit Entries
b. sales and discounts on sales
c. expenses
d. revenues
e. purchases and discounts on purchases.
f. Debit Entries.
Highlights
In the journalizing activities, we always suppose that VAT is not included, apart from the
following situations:
 The exercise indicates that VAT is INCLUDED.
 We are giving or receiving a CHECK.
And if there is no complementary information, we always apply 21% VAT rate.
ACTIVITY 5
1. On January 5th, the firm sells 1,000€ of goods to LIE Ltd. on credit, with a 3% trade
discount. VAT 21%.
2. On January 25th, LIE Ltd pays amount owed to the firm, in cash.
3. On January 26th, the company sells goods worth 1,540 € on credit to LIN Ltd. plus
VAT 21%. The business collects cash for the full amount due, and for this reason we
give the costumer a 3% discount for early payment (included in the invoice)
4. On January 27th, the firm sells goods worth 500€ plus VAT (21%) on credit to
LAVOUR LTD. Trade discount 2%.
5. On January 28th, the business sends an invoice for goods sold for 100€ plus VAT on
credit.
6. On January 29th, the company collects cash from the previous customer (transaction
5), and for this reason we offer a settlement discount of 5 € (plus VAT).
7. On January 30th, the company sells goods to LIE LTD. in amount of 24,600€ (plus
VAT 21%) including a 1% trade discount. The amount is due to be paid in 15 days.
8. On February 1st, our company gives the customer a volume discount for 200 € plus
VAT.
9. On February 2nd, the company sells merchandises on credit to TONE LTD, for 1,000€
with a trade discount of 30€. The customer accepts a Trade Bill for the total amount.
Date of payment: on March 2nd.
10. On February 15th, the company collects cash from Lie ltd, for the amount due
(transaction 7).
11. On March 2nd, the Trade Bill accepted by LIE ltd. was paid by Bank Transfer.
12. On March 3rd, the company sells goods for 10,000 (plus VAT) collecting the entire
amount via bank transfer. The invoice includes a 2% discount for early payment.
32
AG01_Fundamentals of accounting/Unit 4
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
13. On March 4, LAVOURS LTD. pays a 500 € (VAT included) invoice owed to the firm in
cash. For this reason we grant our client with a 30€ cash discount plus VAT 21%.
14. The company sells 200€ for merchandises plus VAT 21%, collecting a check from the
customer. Settlement discount 1%.
15. We grant our customer with a Volume discount of 250€. VAT 21%.
16. The company grants a customer with a discount for delivery delays of 50€ plus VAT.
17. We sell goods for 200€ plus VAT. Paid in cash. Trade discount 1% and Settlement
discount 3%.
18. The company collects 200€ on sales of stock (VAT included).
19. The prior customer (transaction 18) is given by the company a 50€ discount for
defective goods. (VAT 21%).
20. On 5 January, the firm sells goods for cash costing 400€ plus VAT 21%. Trade
discount 1% and settlement discount 1.5%.
21. The company sells goods to LAVOURS LTD. for 1200€, on credit(VAT 21%).Trade
discount 2%.
22. The company collects cash from the previous sale owed by LAVOURS LTD.
Settlement discount 30€ (plus VAT 21%).
23. The company sells 10,000€ of goods to LIE Ltd. on credit. VAT 21%.Trade discount
4%.
24. The business sells goods worth 20,000€ to LIND Ltd. plus VAT 21%. The customer
pays the full amount due at the time the sale was made. Settlement discount 1.3%.
25. The business sells goods worth 1,500€ including VAT on credit to LAVOUR LTD.
26. LAVOURs LTD returned goods for 600€ plus VAT (the goods were paid in cash).
27. Goods were returned for LIE Ltd. for 1,500€ (VAT included 21%).
28. The company gives a volume discount worth 50€ plus VAT.
29. The company grants a customer with a discount for delivery delays of 100€ (21%
VAT included).
30. TONE Ltd returned merchandise purchased on November 2nd because of defects, for
187€ plus VAT, and received full credit.
31. A customer returns merchandise and received a credit note for 500€ (VAT included).
32. LIE Ltd returns goods 340€ worth (plus VAT) because they didn’t fit the customer’s
needs.
33. On September 15th LAVOUR Ltd discovers and returns 248€ of defective
merchandise purchased on September 1st for a cash refund (plus 21% VAT).
34. TONE Ltd returned 111€ (VAT included) of defective merchandise from its invoice
dated September 1st.
ACTIVITY 6.GAMES
Game. Teach Invaders
33
AG01_Fundamentals of accounting/Unit 4
AG01_Fundamentals of Accounting
Unit 4 Sales: Discounts and Returns
TO KNOW MORE
What are IASB and FASB?
IASB
FASB
Bibliography

Practical Bookkeeping. Beginner/intermediate. The Institute of Certified Bookkeepers
Approved Publisher. KAPLAN PUBLISHING.

Beyond Figures. Introduction to Financial Accounting. María del Mar CamachoMiñano. Murat Akpinar. M.J. Rivero-Méndez. Elena Urquía-Grande. Anne Eskola.
EDITORIAL PIRÁMIDE.

www.ifrs.com

www.fasb.com

Bean Counter. Free Accounting and Bookkeeping tutorials.
http://www.dwmbeancounter.com/

http://www.icac.meh.es/Documentos/CONTABILIDAD/PGC%20Ingles.pdf
34
AG01_Fundamentals of accounting/Unit 4